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F ederal r eser ve Ba n k o f Dallas
DALLAS, TEXAS
75222
Circular No. 81-230
D ecember 9, 1981
PROPOSED AMENDMENT
Regulations G, T, and U
TO ALL MEMBER BANKS,
OTHER CREDITORS
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Board of Governors of the Federal Reserve System is proposing
for comment amendments to the requirements set forth in Regulations G, T,
and U th a t over-the-counter (OTC) stocks must m eet for continued inclusion
on the List of OTC Margin Stocks which are subject to the Board’s regulations.
Printed on the following pages are copies of the Board's press
release dated November 29, 1981, and m aterial as submitted for publication in
the Federal R egister. Interested persons are invited to submit comments to
the Secretary, Board of Governors of the Federal Reserve System, Washington,
D.C. 20551, to be received no la te r than January 29, 1982. When submitting
comments, please refer to Docket No. R-0372.
Questions concerning the proposed amendments should be directed
to this Bank's Legal Departm ent, Extension 6171.
Additional copies of this circular will be furnished upon request to
the D epartm ent of Communications, Financial and Community Affairs of this
Bank, Extension 6289.
Sincerely yours,
William H. Wallace
First Vice President
Banks and others are encouraged to use the follow ing incom in g WATS numbers in co n tacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the
extension referred to above.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
v •>;
FEDERAL RESERVE press release
November 19, 1981
F or immediate r e l e a s e
The F e d e r a l R es er ve Board t o d a y pr o po s ed f o r comment amendments
t o some o f t h e c r i t e r i a t h a t o v e r - t h e - c o u n t e r (OTC) s t o c k s must meet and
c o n t i n u e t o meet t o be i n c l u d e d on i t s l i s t o f OTC Margin S t o c k s .
The Board r e q u e s t e d comment by J a n u a r y 2 9 , 1982.
More t h a n 1400 s t o c k s a r e now on t h e l i s t and s u b j e c t t o t h e
Board's r e g u l a t i o n s .
The B o a r d ' s p r o p o s a l would e l i m i n a t e t h e c u r r e n t r e q u i r e m e n t t h a t
an
i s s u e r i s o r g a n i z e d u nde r t h e laws o f t h e U nite d S t a t e s o r a S t a t e ,
t h e r e b y making s t o c k s o f f o r e i g n i s s u e r s t h a t a r e t r a d e d on t h e OTC ma rket
e l i g i b l e f o r margin c r e d i t i f t h e y meet t h e o t h e r c r i t e r i a f o r l i s t i n g .
I t would a l s o e l i m i n a t e c e r t a i n c r i t e r i a now in use and r e d u c e some f i n a n c i a l
c r i t e r i a t o more c l o s e l y r e s e m b l e r e q u i r e m e n t s o f m a jo r ex ch a ng es .
A copy o f t h e B o a r d ' s n o t i c e i s a t t a c h e d .
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A tta ch ment
0-
T i t l e 12 - Banks and Banking
C h a p t e r I I - FEDERAL RESERVE SYSTEM
SUBCHAPTER A - BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
P a r t 207 - S e c u r i t i e s C r e d i t by P er so ns O th er t h a n Banks, B r o k e r s , o r D e a l e r s
P a r t 220 - C r e d i t by Broker s and D e a l e r s
P a r t 221 - C r e d i t by Banks f o r t h e Purpose of P u r c h as i n g o r C a r r y i n g Margin Stocks
[Docket No. R-0372]
Pr op osa l t o Revi se C r i t e r i a f o r I n i t i a l and Conti nued
I n c l u s i o n on t h e L i s t o f OTC Margin S to ck s
AGENCY:
Board of Governors o f t h e F ed er al
ACTION:
Proposed amendments.
Reserve System.
SUMMARY: The Board p r o p o s e s t o amend t h e r e q u i r e m e n t s s e t f o r t h i n Regul a
t i o n s G, T and U f o r i n c l u s i o n and c o n t i n u e d i n c l u s i o n on t h e L i s t o f OTC
Margin S to ck s ("OTC L i s t " ) .
Broker s and d e a l e r s may n o t e xt e nd c r e d i t on
s t o c k s which a r e t r a d e d o v e r - t h e - c o u n t e r u n l e s s such s t o c k s a p p e a r on t h e
OTC L i s t .
Loans by banks and o t h e r l e n d e r s t h a t a r e used t o p u r c h a s e
s t o c k s t h a t a p p e a r on t h e OTC L i s t a r e s u b j e c t t o t h e B o a r d ' s margin r e q u i r e
ments.
The proposed amendments would modify t h r e e a r e a s in t h e e x i s t i n g
r u l e s f o r i n i t i a l and c o n t i n u e d OTC L i s t e l i g i b i l i t y .
F i r s t , t h e y would
p e r m i t e q u i t y s e c u r i t i e s o f f o r e i g n i s s u e r s and American D e p o s i t o r y R e c e i p t s
("ADRs") t o be c o n s i d e r e d f o r OTC L i s t i n c l u s i o n .
Second, t h e p r o p o s a l s
would r e p l a c e c e r t a i n c r i t e r i a which must c u r r e n t l y be met i n t h e a l t e r n a
t i v e and r e p l a c e them w i t h mandatory r e q u i r e m e n t s .
F inally, existing
f i n a n c i a l c r i t e r i a would be r e l a x e d t o more c l o s e l y res e mb l e r e q u i r e m e n t s
e s t a b l i s h e d by ma jo r excha nges .
DATE:
Comments should be r e c e i v e d by J a n u a r y 29, 1982.
ADDRESS: Comments, which s ho u ld r e f e r t o Docket No. R-0372, may be ma i le d
t o t h e S e c r e t a r y , Board o f Governors o f t h e Feder al Reser ve System,
20th S t r e e t and C o n s t i t u t i o n Avenue, N.W., Washi ngton, D.C. 20551,
o r d e l i v e r e d t o Room B-2223 between 8 : 4 5 a.m. and 5:15 p.m. Comments
r e c e i v e d may be i n s p e c t e d a t Room B-1122 between 8:45 a.m. and 5:15 p . m . ,
e x c e p t a s p r o v i d e d in s e c t i o n 2 6 1 . 6 ( a ) o f t h e B o a r d ' s Rules Regardi ng
A v a i l a b i l i t y of I n f o r m a t i o n [12 CFR § 2 6 1 . 6 ( a ) ] .
FOR FURTHER INFORMATION CONTACT: Robert S. P l o t k i n , A s s i s t a n t D i r e c t o r ,
Laura Homer, S e c u r i t i e s C r e d i t O f f i c e r , o r Jamie L e n o c i , F i n a n c i a l A n a l y s t ,
D i v i s i o n of Banking S u p e r v i s i o n and R e g u l a t i o n ( 20 2 -4 5 2- 2 78 1 ).
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SUPPLEMENTARY INFORMATION: In J u l y 1969, t h e Board adop ted c r i t e r i a f o r
i n c l u d i n g s t o c k s on t h e OTC L i s t .
In d i s c u s s i o n s l e a d i n g t o t h e s e l e c t i o n
o f such c r i t e r i a , t h e Board i n d i c a t e d g e n e r a l l y t h a t ( a) s t o c k s t o be
i n c l u d e d on t h e L i s t s hou ld have m a rk et c h a r a c t e r i s t i c s s i m i l a r t o exchangel i s t e d s e c u r i t i e s , ( b) m a n i p u l a t i o n by i s s u e r s t o be i n c l u d e d o r excl ud ed
from t h e OTC L i s t s hou ld be made as d i f f i c u l t as p o s s i b l e , and ( c ) f l u c t u a
t i o n s in t h e number o f s t o c k s on t h e L i s t sho ul d be mi nimized.
The changes now proposed i n t h e OTC L i s t c r i t e r i a a r e t h e r e s u l t
o f a r e v i e w o f t h e OTC margin s t o c k l i s t i n g and c o n t i n u e d l i s t i n g r e q u i r e
ments i n l i g h t o f r e c e n t d evel op men ts i n t h e s e c u r i t i e s m a r k e t s i n g e n e r a l ,
t h e OTC Market in p a r t i c u l a r , and s t a f f e x p e r i e n c e w i t h a d m i n i s t e r i n g
the requirements.
I t is believed th a t revising the c r i t e r i a is esp ecially
ap p r o p r ia te a t t h i s time because of a recen t d ecisio n to re v ise th e List
t h r e e t i m e s a y e a r commencing i n 1982, r a t h e r t h a n t w i c e a y e a r a s i s t h e
current practice.
Thi s has been a f r e q u e n t recommendation o f t h e s e c u r i t i e s
industry.
The f o l l o w i n g i s a d i s c u s s i o n of t h e s p e c i f i c p r o p o s a l s t o amend
OTC L i s t c r i t e r i a .
A. D e l e t i n g Requi rement t h a t I s s u e r Be O rgani ze d Under t h e Laws o f t h e
U n it e d S t a t e s o r a S t a t e .
As e a r l y a s 1964, when t h e SEC f i r s t recommended a br oadeni ng
o f t h e F e de ra l R e s e r v e ' s margin a u t h o r i t y t o encompass o v e r - t h e - c o u n t e r
s t o c k s , t h e Board i n d i c a t e d t h a t s e c u r i t i e s , t o be e l i g i b l e f o r c r e d i t a t a
b r o k e r , s ho u ld meet t h e p r e r e q u i s i t e s o f (1) market d e p t h , (2) a r e l i a b l e
system o f q u o t a t i o n s , and ( 3 ) s u f f i c i e n t i s s u e r d i s c l o s u r e s . The Nati onal
A s s o c i a t i o n o f S e c u r i t i e s D e a l e r s Automated Q u o t a t i o n System ("NASDAQ"),
now i n o p e r a t i o n f o r t e n y e a r s , has g r e a t l y improved t h e e f f i c i e n c y o f t h e
OTC mar ket and has a d d r e s s e d t h e f i r s t two c o n c e r n s o f t h e Board. The
SEC, o v e r t h e p a s t few y e a r s , has improved and s t r e n g t h e n e d i t s d i s c l o s u r e
r u l e s , so t h a t f i n a n c i a l i n f o r m a t i o n on f o r e i g n as well a s d o m e st i c i s s u e s
i s a v a i l a b l e t o t h e p u b l i c in a compr ehensive and t i m e l y f a s h i o n .
In
a d d i t i o n , t h e N at i on al A s s o c i a t i o n of S e c u r i t i e s D e a l e r s ("NASD") r e q u i r e s
t h a t i t s d o me s t i c and f o r e i g n i s s u e r s f i l e f i n a n c i a l d a t a w i t h i t a s a
p r e r e q u i s i t e f o r t r a d i n g on NASDAQ.
None o f t h e a p p r o x i m a t e l y o n e- hun dr ed e i g h t y (180) f o r e i g n s t o c k s
c u r r e n t l y in t h e NASDAQ system can be p l a c ed on t h e OTC L i s t , a s t h e y do
not meet t h e e x i s t i n g c r i t e r i o n , which r e q u i r e s a l l OTC L i s t c a n d i d a t e s t o
be " o r g a n i z e d under t h e laws o f t h e United S t a t e s o r a S t a t e . " A growing
number of r e q u e s t s have been r e c e i v e d from both i n v e s t o r groups and t h e
g e n e r a l p u b l i c t o i n c l u d e f o r e i g n OTC s t o c k s on t h e OTC L i s t .
When t h e
Board f i r s t adopt ed i t s c r i t e r i a f o r i n c l u s i o n on t h e L i s t , t h e r e was
i n s u f f i c i e n t f i n a n c i a l d i s c l o s u r e f o r f o r e i g n i s s u e s . Thi s problem has
now been remedied. F u r t h e r m o r e , f o r e i g n i s s u e s can and do l i s t on n a t i o n a l
exchanges and a r e t h e r e f o r e a u t o m a t i c a l l y e l i g i b l e f o r margin c r e d i t .
In t h i s c o n n e c t i o n , t h e Board a l s o p r o p o s e s t o a l l o w American
D e p o s i t o r y R e c e i p t s ("ADRs") t o be e l i g i b l e f o r i n c l u s i o n on t h e OTC L i s t .
ADRs a r e r e c e i p t s i s s u e d a g a i n s t s e c u r i t i e s o f f o r e i g n i s s u e r s d e p o s i t e d in
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an American d e p o s i t o r y , and a r e exempt from r e g i s t r a t i o n under S e c t i o n 12
o f t h e ' 3 4 Act .
There a r e a p p r o x i m a t e l y s i x t y (60) ADRs c u r r e n t l y i n NASDAQ.
The Board would a l lo w ADRs t o be c o n s i d e r e d f o r i n c l u s i o n on t h e OTC L i s t ,
p r o v id e d t h e f o r e i g n s e c u r i t i e s a g a i n s t which t h e ADRs a r e i s s u e d a r e
r e g i s t e r e d p u r s u a n t t o S e c t i o n 12 o f t h e ' 34 A ct , which imposes c e r t a i n
r e p o r t i n g r e q u i r e m e n t s upon t h e f o r e i g n i s s u e r . T h i s approach i s c o n s i s t e n t
w it h t h e p o l i c y c u r r e n t l y employed by s t o c k exchanges with r e s p e c t t o
exchange l i s t i n g s * / and w i t h t h e S e c u r i t i e s and Exchange Commission' s
c u r r e n t p r o p o s a l t o al lo w ADRs t o be d e s i g n a t e d a s n a t i o n a l market syst em
s e c u r i t i e s . **/
B.
D e l e t i n g A l t e r n a t i v e C r i t e r i o n R e q u i r i n g a $5 M i l l i o n Market
Value and Making Remaining C r i t e r i a Mandatory
The second p ropos al t o change OTC L i s t c r i t e r i a i n v o l v e s t h e
a l t e r n a t i v e r e q u i r e m e n t s w it h r e s p e c t t o t h e s i z e and c h a r a c t e r o f t h e
i s s u e and i s s u e r . At p r e s e n t , a s t o c k can f a i l one o f t h e t h r e e c r i t e r i a
o f a $ 5. 00 minimum p r i c e , $5 m i l l i o n c a p i t a l and s u r p l u s ( h e r e i n a f t e r
c a p i t a l ) , o r $5 m i l l i o n in ma rk et v a l u e and s t i l l be p l a ce d on t h e OTC L i s t .
A s t u d y o f p r i c e movements over t h e p a s t s i x y e a r s i n d i c a t e s t h a t t h e
p r i c e c r i t e r i o n , a s an a l t e r n a t i v e t o c a p i t a l , i s t o o s e n s i t i v e as an o b j e c
t i v e measurement f o r m a r g i n a b i l i t y .
Each r e v i s i o n o f t h e OTC L i s t i s
i n f l u e n c e d by t h e p r i c e t r e n d s o f t h e s ur vey p e r i o d used and many s t o c k s
t h a t meet t h e p r i c e c r i t e r i o n d u r i n g a high p r i c e c y c l e f a i l d u r i n g t h e
s u b s e q u e n t low c y c l e . A s t a f f s t u d y showed t h a t 26% of t h e s to ck added t o
t h e r e c e n t l y r e v i s e d OTC L i s t were f a i l i n g t h e c r i t e r i o n by t h e t i me t h e
OTC L i s t was p u b l i s h e d .
Although t h e c a p i t a l c r i t e r i o n has n ev er been amended, t h e growing
number o f s t o c k s p l aced on t h e L i s t w i t h o u t me e ti n g t h e $5 m i l l i o n minimum
c a p i t a l r e q u i r e m e n t s i n c e t h e 1976 change s has been of c o n c e r n . C u r r e n t l y ,
t h e L i s t i n c l u d e s a p p r o x i m a t e l y one hundred companies r e p o r t i n g l e s s t h a n
$5 m i l l i o n in c a p i t a l (35% of t h e s t o c k s added t o t h e April 6, 1981 L i s t
r e p o r t e d l e s s t h a n $5 m i l l i o n ) .
These companies a r e o f t e n h i g h l y s p e c u l a
t i v e pr omot ional companies with no a c t u a l p r o d u c t i o n t h a t a r e d e s i g n a t e d as
" devel opment al companies" under SEC r u l e s .
Although t h e OTC L i s t i s not
d e s i g n e d t o be one of p r i n c i p a l l y " q u a l i t y - o r i e n t e d " s t o c k s , i t would seem
t h a t t h e i n c l u s i o n o f such companies does no t a d e q u a t e l y e n a b l e t h e Board
t o meet i t s i n h e r e n t r e s p o n s i b i l i t y o f i n v e s t o r p r o t e c t i o n . Companies
r e p o r t i n g low c a p i t a l t h e m s e l v e s have sometimes v o ic e d co nce rn t h a t i n c l u
s i o n on t h e OTC L i s t mi ght r e s u l t i n an i n c r e a s e in s p e c u l a t i v e t r a d i n g
a c t i v i t y in t h e i r s t o c k . The NASD has a l s o r e c e n t l y adopt ed h i g h e r q u a l i
f i c a t i o n s t a n d a r d s f o r i n i t i a l i n c l u s i o n on NASDAQ. The s t a n d a r d s , which
were a d j u s t e d t o r e f l e c t "ongoing economic r e a l i t i e s , " i n c l u d e d r a i s i n g
t h e c a p i t a l r e q u i r e m e n t from $5 00, 000 t o $1 m i l l i o n . At p r e s e n t , t h e New
York Stock Exchange r e q u i r e s c a p i t a l o f $16 m i l l i o n and t h e American Stock
Exchange r e q u i r e s c a p i t a l of $4 m i l l i o n b e f o r e a s to ck may be l i s t e d .
* / An exchange w i l l l i s t ADRs o n ly i f t h e u n d e r l y i n g f o r e i g n s e c u r i t y
a l s o i s l i s t e d a nd , t h e r e f o r e , r e g i s t e r e d under S e c t i o n 12.
**/
SEC Re l ea s e No. 34-18131.
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As i n d i c a t e d b e f o r e , t h e t h i r d a l t e r n a t i v e c r i t e r i o n — an
a g g r e g a t e m a r ke t v a l u e of $5 m i l l i o n — i s a l s o p a r t i a l l y a p r i c e d e t e r
mi nant c r i t e r i o n .
Thi s c r i t e r i o n i s o f l i m i t e d v a l u e , s i n c e i t o n l y a f f e c t s
s t o c k s wor th between $5 and $10 p e r s h a r e .
In o t h e r wo r ds , t h e c r i t e r i a of
$5 minimum p r i c e and one m i l l i o n p u b l i c l y h e l d s h a r e s would a u t o m a t i c a l l y
p r o v i d e a $5 m i l l i o n a g g r e g a t e m a r k e t v a l u e . During t h e p a s t two y e a r s ,
o n l y seven p e r c e n t o f t h e s t o c k s added t o t h e L i s t f a i l e d t h e a g g r e g a t e
ma rket v a l u e t e s t .
Accordingly, i t appears t h a t r e t e n t i o n of t h i s t e s t is
not j u s t i f i e d .
D e l e t i o n of t h e $5 m i l l i o n m a rk et v a l u e t e s t would l e a v e only two
r em ai ni ng a l t e r n a t i v e c r i t e r i a :
a $5 minimum p r i c e p e r s h a r e and c a p i t a l
o f $5 m i l l i o n , bo th of which would be m a nda tor y. T h i s would l e s s e n t h e
e f f e c t o f s y s t e m i c f l u c t u a t i o n s which have i n d i r e c t l y been a f f e c t i n g t h e
s i z e and c o m p o s i t i o n of t h e L i s t .
C. Reducing t h e p u b l i c l y h e l d s h a r e r e q u i r e m e n t from 500,000 t o
4 00, 000 s h a r e s and t h e c a p i t a l r e q u i r e m e n t from $5 m i l l i o n t o $4 m i l l i o n .
The Board has r e c e i v e d c o m p l a i n t s t h a t in some r e s p e c t s t h e p r e
s e n t OTC c r i t e r i a a r e more s t r i n g e n t t h a n some exchange l i s t i n g r e q u i r e m e n t s .
In r e s p o n s e t o t h e s e c o m p l a i n t s and in o r d e r t o l e s s e n t h e impact o f t h e
s w i t c h from a l t e r n a t i v e t o mandatory r e q u i r e m e n t s , t h e Board b e l i e v e s t h a t
some o f t h e f i n a n c i a l c r i t e r i a can be r ed u ce d . These changes would b r i n g
t h e B o a r d ' s OTC margin c r i t e r i a more i n l i n e w it h t h o s e o f t h e American
Stock Exchange.
The Bo ar d, t h e r e f o r e , p r o p o s e s t h a t t h e p u b l i c l y h e l d s h a r e s
r e q u i r e m e n t be redu ce d from 500, 000 t o 40 0, 000 s h a r e s and t h a t t h e c a p i t a l
r e q u i r e m e n t be reduced from $5 m i l l i o n t o $4 m i l l i o n .
D.
C on ti nued I n c l u s i o n on t h e OTC L i s t .
The Board p r o p o s e s t h a t c o r r e s p o n d i n g changes t o t h e c r i t e r i a f o r
c o n t i n u e d i n c l u s i o n on t h e OTC L i s t be made. The c o n t i n u e d l i s t i n g c r i t e r i a ,
which a r e l e s s s t r i n g e n t t h a n t h e i n i t i a l c r i t e r i a , would c o n t a i n mandatory
r e q u i r e m e n t s o f an a v e r a g e minimum o f $1 p r i c e and $1 m i l l i o n i n c a p i t a l ,
r a t h e r t h a n $3 p e r s h a r e and $ 2 . 5 m i l l i o n as a t p r e s e n t . These changes
would promote s t a b i l i t y o f t h e L i s t and would a l s o l e s s e n t h e impact of
t h e s wi t c h from a l t e r n a t i v e t o mandatory r e q u i r e m e n t s .
I f t h e p r o p o s a l s a r e a d o p t e d , t h e Board a t t h i s t i me would e x p e c t
t o app ly t h e new c r i t e r i a only t o newly added s t o c k s . C u r r e n t OTC margin
s t o c k s would be “ g r a n d f a t h e r e d " under t h e e x i s t i n g c o n t i n u e d c r i t e r i a f o r
two y e a r s .
I f t h e i r c a p i t a l p o s i t i o n does not i n c r e a s e o r t h e y o t h e r w i s e
f a i l t o meet t h e c o n t i n u e d l i s t i n g c r i t e r i a a t t h a t t i m e , t h e y would be
s u b j e c t t o d e l e t i o n from t h e OTC L i s t .
A c c o r d i n g l y , p u r s u a n t t o §§ 7 and 23 o f t h e S e c u r i t i e s Exchange
Act o f 1934, a s amended (15 U.S.C. §§ 78g, 78w), t h e Board pr o po s es t o
amend R e g u l a t i o n s G, T and U (12 CFR P a r t s 207, 220 and 221 r e s p e c t i v e l y )
as f o l l o w s :
-
5
-
PART 207 — SECURITIES CREDIT BY PERSONS OTHER THAN BANKS, BROKERS, OR DEALERS
A.
S e c t i o n 2 0 7 . 5 — SUPPLEMENT
*
(d)
*
*
*
★
Re qui r eme nt s f o r i n c l u s i o n on l i s t o f OTC margin s t o c k s
( 1) The s t o c k i s r e g i s t e r e d under s e c t i o n 12 o f t h e
S e c u r i t i e s Exchange Act o f 1934 ( " t h e A c t " ) , o r i s an
American D e p o s i t o r y R e c e i p t ("ADR") o f a f o r e i g n i s s u e r
whose s e c u r i t i e s a r e r e g i s t e r e d u nd er s e c t i o n 12 o f t h e
Act, or i s a stock of a foreign i s s u e r require d to f i l e
r e p o r t s under s e c t i o n 15(d) o f t h e Act,
*
*
*
( 4) t h e i s s u e r has been i n e x i s t e n c e f o r a t l e a s t
three years,
*
*
*
( 7) There a r e 4 00, 000 o r more s h a r e s o f such s t o c k o u t
s t a n d i n g in a d d i t i o n t o s h a r e s h e l d b e n e f i c i a l l y by
o f f i c e r s , d i r e c t o r s o r b e n e f i c i a l owners o f more t h a n
10 p e r c e n t o f t h e s t o c k ,
( 8 ) The minimum a v e r a g e bid p r i c e of such s t o c k , a s
d e t e r m i n e d by t h e Boar d, i s a t l e a s t $5 per s h a r e , and
( 9) The i s s u e r has a t l e a s t $4 m i l l i o n of c a p i t a l ,
s u r p l u s , and u n d i v i d e d p r o f i t s .
(e)
Requ ir ement s f o r c o n t i n u e d i n c l u s i o n on l i s t o f OTC
margin s t o c k s .
(1) The s tock i s r e g i s t e r e d under s e c t i o n 12 o f t h e
S e c u r i t i e s Exchange Act o f 1934 ( " t h e A c t " ) , o r i s an
American D e p o s i t o r y R e c e i p t ("ADR") of a f o r e i g n i s s u e r
whose s e c u r i t i e s a r e r e g i s t e r e d under s e c t i o n 12 of
th e Act, or i s a stock of a foreign is s u e r required
t o f i l e r e p o r t s under s e c t i o n 15(d) o f
t h e A ct ,
*
*
*
(4)
D ai l y q u o t a t i o n s f o r b o t h bi d and as ked p r i c e s
for
t h e s to ck a r e c o n t i n u o u s l y a v a i l a b l e t o t h e g en e r a l
public,
(5) There a r e 300, 000 o r more s h a r e s o f such s t o c k
o u t s t a n d i n g i n a d d i t i o n t o s h a r e s h e l d b e n e f i c i a l l y by
o f f i c e r s , d i r e c t o r s , o r b e n e f i c i a l owners o f more t h a n 10
p e r c e n t of t h e s t o c k ,
6
-
-
(6) The minimum a v e r a g e b i d p r i c e o f such s t o c k s , as
d e t e r m i n e d by t h e Board , i s a t l e a s t $1 p e r s h a r e , and
( 7) The i s s u e r has a t l e a s t $1 m i l l i o n o f c a p i t a l ,
s u r p l u s , and u n d i v i d e d p r o f i t s .
P a r t 220 — CREDIT BY BROKERS AND DEALERS
A.
S e c t i o n 2 2 0 . 8 — SUPPLEMENT
*
(h)
*
*
*
*
Re qu ir eme nt s f o r i n c l u s i o n on l i s t o f OTC margin s t o c k s
( 1) The s t o c k i s r e g i s t e r e d under s e c t i o n 12 o f t h e
S e c u r i t i e s Exchange Act o f 1934 ( " t h e A c t " ) , o r i s an
American D e p o s i t o r y R e c e i p t ("ADR") o f a f o r e i g n i s s u e r
whose s e c u r i t i e s a r e r e g i s t e r e d u n de r s e c t i o n 12 o f t h e
Act, or i s a stock of a foreig n i s s u e r required to f i l e
r e p o r t s u nder s e c t i o n 15(d) o f t h e A c t ,
★
*
*
( 4) t h e i s s u e r has been i n e x i s t e n c e f o r a t l e a s t
three years,
*
*
*
( 7) There a r e 4 00, 000 o r more s h a r e s o f such s t o c k
o u tsta n d in g in ad d itio n to shares held b e n e f i c i a l l y
by o f f i c e r s , d i r e c t o r s o r b e n e f i c i a l owners o f more
t h a n 10 p e r c e n t o f t h e s t o c k ,
( 8) The minimum a v e r a g e b i d p r i c e o f such s t o c k , a s
d e t e r m i n e d by t h e Boar d, i s a t l e a s t $5 p e r s h a r e , and
(9) The i s s u e r has a t l e a s t $4 m i l l i o n o f c a p i t a l ,
s u r p l u s , and u n d i v i d e d p r o f i t s .
( i ) Requ ir emen ts f o r c o n t i n u e d i n c l u s i o n on l i s t o f OTC margin
stocks
(1) The s t o c k i s r e g i s t e r e d u nd er s e c t i o n 12 o f t h e
S e c u r i t i e s Exchange Act o f 1934 ( " t h e A c t " ) , o r i s an
American D e p o s i t o r y R e c e i p t ("ADR") o f a f o r e i g n i s s u e r
whose s e c u r i t i e s a r e r e g i s t e r e d under s e c t i o n 12 of
t h e A ct , o r i s a s t o c k o f a f o r e i g n i s s u e r requi red
t o f i l e r e p o r t s under s e c t i o n 15(d) o f t h e Act,
★
★
★
-
7
-
( 4) D a i l y q u o t a t i o n s f o r b ot h b i d and asked p r i c e s f o r
th e stock a re con tin u o u sly a v a i l a b l e to t h e general public
( 5 ) T h e re a r e 30 0, 00 0 o r more s h a r e s o f such s t o c k
o u t s t a n d i n g i n a d d i t i o n t o s h a r e s h e l d b e n e f i c i a l l y by
o f f i c e r s , d i r e c t o r s , o r b e n e f i c i a l owners o f more t h a n 10
percent of the stock,
( 6) The minimum a v e r a g e bid p r i c e o f such s t o c k s , a s
d e t e r m i n e d by t h e Board , i s a t l e a s t $1 p e r s h a r e , and
( 7 ) The i s s u e r has a t l e a s t $1 m i l l i o n o f c a p i t a l ,
s u r p l u s , and u n d i v i d e d p r o f i t s .
PART 221 — CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRYING MARGIN
STOCKS
III.
A.
S e c t i o n 2 2 1 . 4 — SUPPLEMENT
*
*
(d)
*
*
*
Requ ir ement s f o r i n c l u s i o n on l i s t o f OTC margin s t o c k s .
( 1) The s t o c k i s r e g i s t e r e d under s e c t i o n 12 o f t h e
S e c u r i t i e s Exchange Act o f 1934 ( " t h e A c t " ) , o r i s an
American D e p o s i t o r y R e c e i p t ("ADR") o f a f o r e i g n i s s u e r
whose s e c u r i t i e s a r e r e g i s t e r e d u n de r s e c t i o n 12 of
th e Act, or i s a stock of a foreign i s s u e r required
t o f i l e r e p o r t s under s e c t i o n 15(d) o f t h e A c t,
*
*
( 4) t h e i s s u e r has been
three years,
★
*
in e x i s t e n c e
★
for atle ast
★
( 7) There a r e 40 0, 000
o r more
s h a r e s o f such
stock
outstanding in a d d itio n to shares held b e n e f i c i a l l y
by o f f i c e r s , d i r e c t o r s o r b e n e f i c i a l owners o f more
t h a n 10 p e r c e n t o f t h e s t o c k ,
( 8) The minimum a ve r a g e b i d p r i c e o f such s t o c k , a s
d e t er mi n ed by t h e Board, i s a t l e a s t $5 p e r s h a r e , and
(9) The i s s u e r has a t l e a s t $4 m i l l i o n o f c a p i t a l ,
s u r p l u s , and u n d i v i d e d p r o f i t s .
8
-
(e)
-
R e qu i re me nt s f o r c o n t i n u e d i n c l u s i o n on l i s t o f OTC
margin s t o c k s .
(1) The s t o c k i s r e g i s t e r e d u nde r s e c t i o n 12 o f t h e
S e c u r i t i e s Exchange Act o f 1934 ( " t h e A c t " ) , o r i s
an American D e p o s i t o r y R e c e i p t ("ADR") o f a f o r e i g n
i s s u e r whose s e c u r i t i e s a r e r e g i s t e r e d under s e c t i o n 12
of th e Act, o r is a stock o f a foreign i s s u e r required
t o f i l e r e p o r t s under s e c t i o n 15( d) o f
t h e Act,
★
*
*
(4)
D a i l y q u o t a t i o n s f o r both b i d and a sk ed p r i c e s f o r
t h e s t o c k a r e c o n t i n u o u s l y a v a i l a b l e t o t h e g en e r a l p u b l i c ,
(5) There a r e 300, 000 o r more s h a r e s o f such s t o c k
o u t s t a n d i n g in a d d i t i o n t o s h a r e s h e l d b e n e f i c i a l l y by
o f f i c e r s , d i r e c t o r s , o r b e n e f i c i a l owners o f more t h a n 10
p erce n t of th e stock,
(6) The minimum a v e r a g e bid p r i c e o f such s t o c k s , as
d e t e r m i n e d by t h e Boar d, i s a t l e a s t $1 p e r s h a r e , and
(7) The i s s u e r has a t l e a s t $1 m i l l i o n o f c a p i t a l ,
s u r p l u s , and u n d i vi d e d p r o f i t s .
INITIAL REGULATORY FLEXIBILITY ANALYSIS:
The Board r e q u e s t s comment on proposed amendments t o t h e
r e q u i r e m e n t s f o r i n c l u s i o n and c o n t i n u e d l i s t i n g on t h e L i s t o f OTC
Margin S t o c k s .
These r e q u i r e m e n t s a r e d e s i g n e d t o i d e n t i f y t h o s e s t o c k s
t r a d e d i n t h e o v e r - t h e - c o u n t e r ma rket which have t h e d e g r e e of n a t i o n a l
i n v e s t o r i n t e r e s t , de pt h and b r e a d t h o f m a r k e t , t h e a v a i l a b i l i t y of
i n f o r m a t i o n r e s p e c t i n g t h e s t o c k and i t s i s s u e r and t h e c h a r a c t e r and
permanence o f t h e i s s u e r t o meet t h e B o a r d ' s s t a t u t o r y r e s p o n s i b i l i t i e s .
Many o f t h e proposed changes r e l a x t h e l i s t i n g c r i t e r i a t h a t
OTC s t o c k s must s a t i s f y , b ot h t o q u a l i f y f o r i n c l u s i o n on t h e OTC L i s t
and t o remain on i t .
For example, f o r e i g n s t o c k s would become e l i g i b l e
f o r i n c l u s i o n , and many o f t h e f i n a n c i a l r e q u i r e m e n t s o f t h e OTC L i s t
would be a l t e r e d t o r es embl e more c l o s e l y t h o s e o f t h e American Stock
Exchange.
However, one s i g n i f i c a n t proposed change working in t h e
d i r e c t i o n o f t i g h t e n i n g s t a n d a r d s would e l i m i n a t e t h e p r a c t i c e of us ing
a l t e r n a t i v e c r i t e r i a and t h e r e b y make t h e c a p i t a l c r i t e r i o n mandator y.
Because t h e p r o p o s a l s i n v o l v e a m i x t u r e o f r e l a x i n g and
t i g h t e n i n g c h a n g e s , i t i s not e a s y t o j u d g e t h e o v e r a l l impact on small
dome st i c e n t i t i e s - - p r i m a r i l y t h o s e s m a l l - s i z e d c o r p o r a t i o n s whose s t o c k s
a r e t r a d e d in t h e o v e r - t h e - c o u n t e r m a r ke t. While t h e pr oposed r e l a x a t i o n s
-
9
-
in s p e c i f i c c r i t e r i a would make i t e a s i e r f o r some f i r m s t o q u a l i f y f o r
t h e L i s t and remain on t h e L i s t , t h e proposed e l i m i n a t i o n o f a l t e r n a t i v e
c r i t e r i a w i l l deny OTC margin e l i g i b i l i t y t o o t h e r s t o c k s .
In p a r t i c u l a r ,
t h e p ropos al t o make a l l c r i t e r i a m a n d a t o r y , i n c l u d i n g t h e proposed
minimum n e t wor th l i s t i n g r e q u i r e m e n t , would deny i n i t i a l a c c e s s t o t h e
L i s t t o t h o s e f i r m s w it h l e s s t h a n $4 m i l l i o n in c a p i t a l , s u r p l u s , and
u n d i v i d e d p r o f i t s whose s t o c k s a r e t r a d e d OTC. Had t h i s c r i t e r i o n been
i n e f f e c t i n r e c e n t y e a r s , a s u b s t a n t i a l number o f s t o c k s t h a t were
added t o t h e L i s t would be e x c l u d e d .
Of c o u r s e , e x c l u s i o n from t h e OTC L i s t does not n e c e s s a r i l y
p r e c l u d e a s t o c k from becoming m a r g i n a b l e ; t h e i s s u i n g f i r m can
a l t e r n a t i v e l y t a k e s t e p s t o l i s t t h a t s to ck on a n a t i o n a l exchange.
Such l i s t i n g a u t o m a t i c a l l y c o n f e r s e l i g i b i l i t y f o r margin c r e d i t t o
s t o c k ; however, such l i s t i n g does i n v o l v e a d d i t i o n a l c o s t t o t h e company.
I t s ho ul d be no te d t h a t t h e NASD has r e c e n t l y announced
changes t o i t s NASDAQ Na ti o na l L i s t l i s t i n g r e q u i r e m e n t s , some of which
became e f f e c t i v e November 17, 1981. The changes w i l l r e q u i r e some
t i m e f o r a d j u s t m e n t - - b y i n v e s t o r s , t r a d e r s , and i s s u e r s a l i k e - - a n d
co ul d change t h e c h a r a c t e r i s t i c s o f o v e r - t h e - c o u n t e r t r a d i n g .
A c c o r d i n g l y , t h e Board b e l i e v e s t h e use o f t h e Nati onal L i s t - - w h i c h has
been s u g g e s t e d as an a l t e r n a t i v e t o i t s own c r i t e r i a - - i s p re ma tu r e a t
t h i s t i m e . As soon a s e x p e r i e n c e i s g ai n e d w i t h t h e Nati onal L i s t t h e
Board w i l l weigh i t s use i n view o f i t s s t a t u t o r y r e s p o n s i b i l i t i e s .
By o r d e r o f t h e Board o f Governors o f t h e F ed er al Reser ve System,
November 18, 1981.
( s i g n e d ) Wi l li a m W. Miles
William W. Wiles
S e c r e t a r y o f t h e Board
[SEAL]
@FedFRASER